Loans loans everywhere and not a cent to spend

Before I even start, I want to be clear that I am not espousing a political opinion here. I hate politics. I'm not interested in them. But I do like investing (well, up until recently). And we all know I *LOVE* retail (well, up until recently). I want to go back to the good ole days of making and spending stupid amounts of money just as much as you do. But it would be disingenuous to suggest that it were possible to do so. I firmly believe that we are in the midst of a Great Adjustment not unlike that which our grandparents experienced... but different because we got here differently.

So, what I'm trying to figure out how we get out of this mire in which we're muddling. I'm all about common sense, or at least I'd like to be. The President just talked about 'new common sense rules of the road' (that's a direct quote from the President's speech... just a second ago), but then he's talking about increasing the lending again. He mentioned that it was only through borrowing that Americans could buy homes (okay), buy cars (can't we buy cheaper cars?) and attend college (a little help is fine, but those kids coming out of college with $110k in debt are in a world of hurt that will take YEARS to dig out from.)

Okay, the banks have shut off the faucet completely. For businesses. For consumers. For everyone. That's not good. We know what happens when there is no credit - there is no economy. I don't like that. You don't like that. Heck, no one in the world likes that. On the other hand, when there's too much credit, problems also ensue.

I am so very very concerned that all the talk is about getting lending moving again so that the consumer can bounce back. Our consumers have been consuming too much, have collected too much debt already, and they're going to be digging out for a long long time. I'm not saying I'm an expert, but I play one on TV. Every indicator I can find shows the U.S. consumer is tapped out, drowning in debt, swimming in stuff that they thought they needed but really didn't.

Let's think about this. Home mortgage default rates (delinquent loans as a percentage of total loans) are over 5%. Maybe that's because the long-term average percentage of Americans who own homes is 65%... and even with all the foreclosures we're still at roughly 67.5% owning homes. Too many people who couldn't afford a home were allowed to buy a home anyway, at least for a time.

We all know about the problem with subprime loans, but no one is really talking about the next pig in the python: the Option Adjustable Rate Mortgage problem that is staring us in the face. These Option ARMS are even more toxic than the subprime mortgages, maybe that's why no one wants to talk about them.

I gave a talk last weekend on the economy entitled "Fairy Tales Retold: Today's Economy Explained." In the case of consumer credit, my point is that you can wait for Prince Charming all you want, but he's not going to pay off your debt... he can't afford to pay off his own! Okay, we're a little off the highs, but consumer credit (not including mortgages, just credit card-like stuff) is over 21% of personal income. Back in 1974 we were closer to 15%. Of course, we didn't all have fabulous designer handbags and great technological toys back then either.

I can't tell you how many folks I've had tell me that their home is their savings account. Great thought until home prices fall 20%. A better place for savings might be, wait for it, a savings account. But as a culture we apparently don't believe in those either, maybe because they don't give you the rush that the stock or housing markets do. They also don't turn your stomach like the stock or housing markets.



In the graph above I've shown the personal savings rate as a percentage of disposable income since 1959. The average over that time period is indicated by the gold line across the middle: 6.9%. It doesn't take a statistician to see that the average is only that high because of the early years in the graph. In fact, since the beginning of 2005, the average is only 0.8%. No, that's not a typo. Less than 1% of our disposable incomes are being saved. No wonder we're living on debt, we don't have anything in savings for emergencies. And up until last quarter, a sale at Macy's qualified as an emergency.

So when the tap got turned off by the banks and it looked like they were really serious this time, is it any wonder that retail sales took a nose dive down the rabbit hole?



That little graph there shows the year over year change in retail sales since 1992. That drop-off on the right side? Unprecedented. Ugly too.

So we have no savings in our homes or savings accounts. We have lots of credit card debt. We have lots of people defaulting on their mortgages and more to come. We're a consumer economy (70% of the economy is consumer driven), and we're not buying any more... because we can't.

I'm not saying we won't get out of this, because we will. But anyone who's believing it's going to be quick or easy? Not so much. I don't have the answer, but I'm pretty sure we can't leverage ourselves out of it this time.

Yep, he saw his shadow all right

So I know I'm a couple of days late, but on Monday Punxsutawney Phil (the most famous groundhog ever) saw his shadow, thus predicting another six weeks of winter.

Interestingly, in a similar ceremony held this morning in Issaquah, Washington, my friends at Costco confirmed Phil's bleak outlook. The company came out with comparable store sales of -2% ... not horrid when you consider that gasoline price declines hurt sales by 4% in the US and the strong dollar accounted for an 18% (yes, eighteen percent, that's not a typo) swing in International comparable sales from 9% in local currencies to -9% in dollars. But still, not good. Even worse, earnings for this quarter are going to be 'significantly' below the $0.70 estimated by Wall Street pundits and the company is withdrawing guidance for the rest of the year. 'Significantly' translated to 10% below expectations last quarter... but the company isn't offering interpretations this quarter. Let's just call it yucky and move on.

More of an issue than sales were margins on discretionary items. Let's face it, even though Costco got good pricing on some fabulous items, they were competing against mainstream retailers that were quite literally willing to give away the shirts on their racks in order to clear inventory. One example is the cashmere sweaters they had in the Issaquah store. They arrived in November with a price of about $69. Normally, they would have sold like hot cakes at the original price, but these are not, if you haven't noticed, normal times. By Christmas they were about $49. The killer, though, was that in mid to late January there were STILL cashmere sweaters for sale. Maybe cashmere is 'out' right now. I noticed it wasn't selling well at Macy's either. But more likely, Costco's 'bargain' price didn't look as bargain-ish when compared to the discounts the mainline retailers offered. Thank goodness they sell food too, which drove the frequency of customer visits to a high 4%.

Bottom line for me, though, is that if Costco which sells food/staples (~60% of revenue) and discounted discretionary items (~40% of revenue) is having issues, we are obviously still smack dab in the winter of our discontent. It doesn't appear likely that the sun, my friends, is going to shine on the consumer in the near term - literally or figuratively.

An afternoon at the museum

I had occasion to meet a friend for lunch today. We decided to take our chances and try to get in at a favorite restaurant in the local museum. This particular museum is the best in the area and full of lots of lovely displays that they change with the seasons.

Frankly, because it's such a beautiful place as well as a yummy restaurant, I was shocked shocked shocked at how empty both were. Yes, it was midday during the week, but come on. We weren't just seated immediately, we were seated in a really empty section, our food arrived really quickly, and the place stayed fairly empty the entire time we were there.

I suppose the economy has a lot to do with that. Heck, the economy had a lot to do with the museum becoming what it is today. Just last year, I remember when this museum changed its displays because they old ones had been sold out instead of them just being shipped off to the discount liquidators. And it was just last year when that restaurant had an hour long wait at almost anytime of day. But last year consumers had credit cards, they had investment portfolios, the economy was going just fine (or so we thought) and consumers were spending like drunken sailors. Ahh, the good ol' days.

It's just so sad to see such a fabulous, high end museum mall so bereft of shoppers. And I love love love the Cheesecake Factory, but if the place stays that easy to get into, it'll quickly be impossible to get a table since they'll be closed.

If anyone out there has insight as to how this could reverse itself quickly, please do tell! My inbox in open, and I'd love some reason to be more positive on both the stock market in general as well as retail stocks in particular. But today Macy's cut 7,000 jobs, which is a pretty clear indicator that they're not looking for a quick turnaround either.